Category Archives: Financial Crisis

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Excellence in Risk Management

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The Great Recession is not known for inspiring great things, but it did spur the creation of the Dodd-Frank bill, which, among many things, created the Financial Stability Oversight Council and the Federal Insurance Office. And the near-collapse of the U.S. economy did wonders for the discipline of risk management.

As a result, according to a new survey from Marsh and the Risk and Insurance Management Society (RIMS), executives in the C-suite are expecting much more from the risk managers at their company.

Below are a few of the key findings from the report:

  • An overwhelming majority of respondents said that senior management’s expectations of their organizations’ risk management departments have grown over the past three years. Senior management’s list of desired changes from risk managers includes integrating risk management deeper with operations, executing daily risk management activities more efficiently, providing improved analysis and quantification, and leading enterprise risk management (ERM) activities.
  • The most common focus area for 2011 is strengthening strategic risk management, which was cited by more than half of survey respondents. For the second year, this area came out on top, although barriers to doing so remain.
  • The top barrier cited to senior leadership understanding of the risk landscape was silos within the organization. This is the same answer given in prior years, and is something that organizations should begin to confront if they have not already done so. One way to tear down the silos is to create or strengthen cross-functional risk committees.
  • As the role of chief risk officer (CRO) continues to develop, we are beginning to see some differences in how they view and prioritize the issues. For example, CROs were much more likely than other risk managers to categorize senior management’s change in expectations a “very significant.” CROs said strengthening ERM capabilities and integrating ERM into strategic planning were focus areas for 2011.
  • Economic conditions ranked as the number one risk among respondents, and was also the risk that they were least comfortable with their organizations’ ability to manage. In other areas, such as business disruption, risk managers and the C-suite are not as aligned in their views of how prepared their companies are to manage the risk.
  • Nearly 60% of companies said their use of data and analytics has changed over the past three years. This is likely a reflection of leadership’s desire for there to be more transparency and quantification around risk decisions, particularly the economic implications. Despite the stated changes, however, there appears to be a need for companies to better use the available tools and analytics.

And let’s take a look at the areas in which senior management’s expectations of the risk management department have grown:

It seems the financial crisis continues to shine a light on the importance of risk management as a whole and, more specifically, enterprise risk management and strategic risk management.

Survey Says? Risk Management Raises Profitability

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A new report from the Economist Intelligence Unit and Oracle Financial Services sheds further light on the elevation of risk management since the financial crisis. The general conclusion is similar to the one we have been hearing ad naseum since a failure of risk management tanked the global economy.

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As stated in “Transforming the CFO Role in Financial Institutions:  Towards Better Alignment of Risk, Finance and Performance Management” (PDF):

In such a challenging environment, financial institutions must now devise a sustainable growth strategy and be better protected against new or emerging risks. To do so, many finance departments are recasting their business processes in an effort to provide better access to information for internal decision-making, risk management, financial reporting and regulatory compliance.
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Blah blah blah. Same ol’, same ‘ol. Rhetoric and platitudes.

Right?

Maybe not.

This report, in addition to re-stating the need for better risk and finance alignment is actually speaking about evidence directly rooted in the bottom line. The execs surveyed are reporting that financial firms are more profitable when these two departments are in sync.

Financial institutions that benchmark themselves well on aligning their risk and finance functions also say they are doing better financially. Among survey respondents, of those who rank themselves much better than their peers at alignment between risk and finance, 60% are also much better at financial performance and 92% are above average. The equivalent figures for those who are average or worse at alignment are 8% and 32% respectively. The benefits are both specific, such as identifying potentially profitable clients, and general, such as providing a greater understanding of the global context in which major strategic decisions are made.

Those numbers seem substantial.

And this is not just a reality in 2011; this was the case all along. Those firms that prioritized risk management the most — not just rhetorically, but by paying big bucks for talented risk managers with decision-making insight — fared much better in 2008 than those that didn’t.

Research shows that at the 15% of US banks where the chief risk officer (CRO) was among the five highest-paid executives in 2006, the proportion of total assets made up by mortgage-backed securities at the time of the crisis was one-fortieth that of banks where the CRO was less well paid.

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There is even a correlation between higher CRO pay and lower stock volatility.

One-fortieth. That’s 1/40th. Or 2.5% if you prefer.

So you’re telling me that companies that committed to paid risk managers who they valued as decision makers to foresee, navigate through and mitigate pitfalls did much better in avoiding risks than those that didn’t? You don’t say?

For the past three years, we have repeatedly been saying that if this financial meltdown isn’t enough to move the needle on pushing risk management up the corporate hierarchy, nothing will be. But as more and more insight like this in unveiled, it’s hard to believe that companies can continue to ignore the obvious: risk management saves — and makes — money.

The “Wall Street Mind” and “Too Big to Fail”

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Simon Johnson is the former IMF chief economist and current professor at MIT’s Sloan School of Management. And to say he is skeptical about the friendly relationship between government and Wall Street — particularly Goldman Sachs — would be putting it way too lightly.

He seems to be looking around at the industry “overhaul” that has occurred since the banks tanked the economy and wondering why everything is exactly the same as it was before. Very little has changed, he asserts, and he still thinks that at least one major firm remains entirely too big too fail regardless of how much Congress members want to walk around patting themselves on the back for passing Dodd-Frank last summer.

At the Institute for New Economic Thinking conference in Bretton Woods, he asked the following. (His transcribed comments here come from the video below.)

“Who in the room thinks that if Goldman Sachs were to hit a rock, a hypothetical rock — I’m not saying they have, I’m not saying they will. If they were to hit a rock today, Saturday, who here thinks they’ll be allowed to fail like Lehman Brothers did unimpeded by any kind of government bailout starting Monday morning? Can Goldman Sachs fail?”

After this, he pauses and looks around the room from his podium. You can’t see the crowd on the video but it becomes apparent that no one spoke up or raised their hand.

“I’ve asked this question around the country [and] only one person has ever raised his hand. It was in New York. He had a big short position in Goldman stock. That’s New York. But seriously, it can’t happen. Goldman Sachs is a $900 billion bank, total balance sheet. You might want to say it’s too big to fail. You might want to use the language of [Bank of England governor] Mervyn King and say it’s ‘too important to fail.’ You wouldn’t allow it to fail. I wouldn’t allow it to fail if it was my decision. You wouldn’t either. It’s too scary today given the nature of the global economy. And from that scariness comes power — comes an enormous amount of power.”

He then asks the audience what happened to the plans to reform this? Why is “too big too fail” still allowed to persist? Why is, as he claims, “it going the other way … too big to fail firms have gotten bigger”?

In his explanation is a lot of truth and straight talk about what he believes has been a failure to reform. Watch the video below in its entirety to hear all his insight. It’s 10 minutes long but you can make the time. (via The Economist)

In somewhat related news, New York magazine has put together a multi-part feature on “The Mind of Wall Street.” At it’s core, the piece asks if, when it comes to post-financial crisis reform, Wall Street won then why is it so worried.

Combined, both go a long way to explaining the current climate in the financial sector.

The 10 Best Industry Blogs

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Bloggin’ ain’t easy. Doing it well takes commitment, research, accuracy and regular postings. And, of course, a knack for writing. The staff of Risk Management has a few favorite blogs that we visit on a regular basis for their insight, knowledge and timeliness. The following are 10 of our favorite risk management and insurance blogs:

  1. The Call: Foreign Policy magazine’s blog posts are authored by Ian Bremmer, president of the global risk research and consulting firm Eurasia Group. The blog uses political science to analyze the future of politics and the global economy. When it comes to industry blogs, this one is my personal favorite.
  2. Terms + Conditions: The Insurance Information Institute’s blog covers current disasters, risks, laws, regulations and market conditions, among other topics. Claire Wilkinson, vice president for global issues at III, has done a great job of posting timely articles first thing in the morning, and it seems she’s been joined recently by James Lynch, a veteran insurance professional and blogger.
  3. Clear Risk: The company itself works with organizations to help improve their risk management techniques and the blog, managed by Craig Rowe, covers the various aspects of risk management and insurance in a well-organized and easy to read manner.
  4. Schneier on Security: Bruce Schneier, a security technologist and author, manages this blog, which focuses on security and security technology. He has testified on security before the United States Congress and has written articles for some of the worlds biggest publications. Schneier, an opinionated tech man, knows what he’s talking about — and it shows in every post.
  5. Workers’ Comp Kit Blog: This blog covers (you guessed it) everything relating to the world of workers’ comp. It acts as a discussion forum for employers to learn about workers’ comp cost containment, techniques and strategies. The blog is managed by Rebecca Shafer, and attorney and risk consultant, and features posts by more than 30 other professionals. Though the format of the blog can be somewhat distracting (ads galore), the content is useful.
  6. GC Capital Ideas: The website, a part of reinsurance intermediary Guy Carpenter, refers to itself as more of a platform from which it disseminates information that has been published through reports, briefings and bylined articles. I refer to it as a blog and its information is has proved valuable to our team on more than one occasion.
  7. Calculated Risk: This blog offers a sophisticated analysis of economic data, from consumer sentiment to the mortgage and housing industry to the banking industry. Managed by Bill McBride, a full-time blogger with a background in finance and economics, Calculated Risk proves successful at turning complicated technical data into useful information for the masses. McBride publishes several posts per day.
  8. Political Risk Explored: Brian Hasbrouck, a man with a serious interest in the international political economy, manages this blog. PRE’s short and sweet posts pull from other publications or reports that the blog’s readers may have never come across on their own. The blog’s simple format makes it easy to navigate and read and the Twitter feed embedded on the right-hand side is an added bonus.
  9. Product Liability Monitor: This blog was created by attorneys in the Weil product liability practice and discusses key trends, developments and events that have shaped and are shaping the product liability landscape. The blog’s clean format is something to be imitated.
  10. The FCPA Blog: Its simple name leaves no guesses as to what it covers — news and views about the United States Foreign Corrupt Practices Act. Managed by Richard Cassin, the multiple daily posts gives readers a grim reminder of the oft-corrupt corporate world and analysis of the FCPA’s actions.

If you think we have left off an important blog related to the industry, please let us know in the comments section below.